When times are good, investors can be pretty hands off with portfolio companies. When times are tough, they like to take much more control.
In a new report, law firm Orrick has analysed 350 equity deals completed in Europe last year. It found that more than 95% of them included consent rights for investors — meaning the company is not able to undertake certain actions without their investors’ permission. In 2022, just under 95% of deals included consent rights for investors.
“We saw an increase across the board of a keen desire from investors to retain control over key matters in the operation of their portfolio companies as they sought to respond to changing market conditions,” says Orrick's report.
Investors are also shifting back towards founder-backed warranties, something Orrick notes the market moved away from in 2021. These are contractual statements or promises founders provide about the state of their business that can carry penalties for misrepresentation.
In 2022, 44% of deals required founders to stand behind warranties — which are generally used to reassure investors that the business is healthy and the founders aren’t concealing anything. In 2023, it was 39% of deals.
That’s despite the British Private Equity and Venture Capital Association (BVCA) introducing new documents at the start of 2023, which provide for company-backed (not founder-backed) warranties only.
“As the market settles into the new BVCA model form documents, we expect to see founder-backed warranties on fewer venture transactions, but in the meantime, this remains a heavily negotiated point,” says Orrick's report — leading to protracted deal timelines.
Not board of you
Investors remained keen to take board seats. In 2023, 80% of deals saw lead investors with board appointment rights, with 61% of deals including board observer rights for them. In 54% of deals, lead investors had both a board appointment right and an observer right.
Founders, meanwhile, were able to take two director seats on average — the same as 2022.
That’s leading to bloated boards. In 2023 the share of startup boards with six seats jumped from 1% to 15%, and with seven seats from 1% to 13%.
“This was most strongly witnessed in the increase of board observer appointment rights for investors… in particular at the earlier stages of financing,” says Orrick.
